Schrempf AG has completed a number of transactions during 2019. In January, the company purchased under contract a machine at a total price of €1,200,000, payable over 5 years with installments of €240,000 per year. The seller has considered the transaction as an installment sale with the title transferring to Schrempf at the time of the final payment.
On March 1, 2019, Schrempf issued €10 million of general revenue bonds priced at 99 with a coupon of 10% payable July 1 and January 1 of each of the next 10 years. The July 1 interest was paid and on December 30, the company transferred €1,000,000 to the trustee, Flagstad SE, for payment of the January 1, 2020, interest.
As the accountant for Schrempf, you have prepared the statement of financial position as of December 31, 2019, and have presented it to the president of the company. You are asked the following questions about it.
1. Why has depreciation been charged on equipment being purchased under contract? Title has not passed to the company as yet and, therefore, it is not our asset. Why should the company not show on the left side of the statement of financial position only the amount paid to date instead of showing the full contract price on the left side and the unpaid portion on the right side? After all, the seller considers the transaction an installment sale.
2. Bond interest is shown as a current liability. Did we not pay our trustee, Flagstad SE, the full amount of interest due this period?
Instructions
Outline your answers to these questions by writing a brief paragraph that will justify your treatment.